Blog Archives - PFwise.com

Can I Tap My Term Life Insurance Benefits Before I Die?

8/31/2017

Q. Can I tap my life insurance death benefits in advance if I am diagnosed with a terminal illness?

A. Yes, you can!

Some life insurance policies offer "accelerated death benefits", which means you can access the death benefits before you die, if you meet some of the conditions, such as you have a terminal illness.

Please note, the money you receive early will be subtracted from the death benefit your beneficiaries will receive when you die.

Details vary by company, type of policy and state, please contact us if you are interested in this type of life insurance policies.

How Does a New Landlord Check a Tenant's Credit Report?

8/30/2017

Q. I just bought my first rental property, how do I check a tenant's credit report?

A. If you google, you will find many such services, all can be done online easily.

There are basically two different approaches to it, each comes with its own advantages and downside -

a) You Run the Report
You ask the tenant to give you his/her SS# (and the fee) so you can run the report by yourself (e.g. ctcredit.net). The downside: since you have someone else's SS#, it comes with potential liabilities.

b) Your Applicant Runs the Report
You let the tenant do it him/herself (and pay the fee directly), you get a copy of the report (e.g. mysmartmove.com). The downside is you won't get the tenant's SS# which is important if you want to chase the tenant down if anything bad happens later ...

How to Cash Savings Bonds?

8/29/2017

Q. How to cash some of the old savings bonds I have accumulated over the years?

A. You can ask your bank if it cashes paper savings bonds, or use Smart Exchange at TreasuryDirect.gov to convert series E, EE or I paper bonds to electronic bonds, which are easier to redeem.

If My Tree Falls on My Neighbor's Property, Whose Fault Is It?

8/28/2017

Q. If my tree falls on my neighbor's property, who will be responsible for the damage?

A. Your neighbor's homeowners or auto insurance policy will generally pay to fix the damage if your tree falls on neighbor's property and causes a damage.

However, if your neighbor can prove that you were negligent, then you may have to pay for the damage.

If the tree falls but doesn't cause any damage, your neighbor's policy may pay only $500 to $1000 for tree removal. You may want to pay for some of the cleanup.

When to Get an Umbrella Insurance From Another Insurer?

8/27/2017

Q. When should I get an umbrella insurance from a different insurer?

A. Normally it makes sense for you to get an umbrella insurance from the insurer who also insures your home and autos. However, there are situations where an umbrella policy from a separate insurer is best. For example:

You own lots of real estate. Most carriers won't extend their umbrella coverage to more than a few property locations.
Your real estate is held in a trust or LLC (limited liability company). If so, you might need a policy from a company offering a "specialty umbrella" policy.
You or a household member has a bad driving record. Most insurers won't provide an umbrella policy if you or your teenagers have had too many tickets/accidents or a DUI.
You operate a business from your home. Homeowner policies don't generally cover losses due to business activities, and neither do their umbrella policies. So business owners working from home need a separate policy.
You need a lot of coverage. Most insurers won't cover you for more than $5 million. If you need more, you have to go elsewhere.

12 Ways To Run Afoul of the IRS

8/26/2017

The IRS offers its annual and updated list of Dirty Dozen scams, a variety of common schemes that peak during filing season. Some are perpetrated by taxpayers who know they are taking liberties. In other cases, scammers have convinced clients there are loopholes for their own profit.

Here is the link to the The Dirty Dozen: 12 ways clients run afoul of the IRS

A Case Study From SBLI That Shows How A Family Can Meet Protective Goals With Reasonable Cost

8/25/2017

Attached is a timely case study from SBLI that shows how a family can meet their protective goals for less than $300 a month. SBLI shows some core benefits at the heart of its Flex Whole Life:

Seven riders with a Guaranteed Level Premium Term Rider that can be included on all whole life products (except single premium)
Term blends, up to two times the base coverage amount, producing affordable premiums and great term rates
Guaranteed cash value and death benefits for a family's peace-of-mind

Can A Beneficiary of A Life Insurance Policy Be A Premium Payer?

8/24/2017

Q. I am a beneficiary of a life insurance policy. I understand it's quite expensive and the insured wants to stop the premium payment. Can I take over the payment so I could get the death benefit in the end?

A. There are four parties to an insurance policy: insured, owner, beneficiary, payer.

As the beneficiary of the insurance policy, you can become a premium payer of the policy, but make sure you ask to transfer ownership of the policy to you so you become an owner as well, otherwise, the owner might cash out the policy after you paying the premium for a few years.

When Should I Stop Buying Term Life Insurance?

8/23/2017

Q. When should I stop purchasing term life insurance?

A. You should stop buying term life insurance once your financial goals are met.

If you are debt free, no loved one depends on your income, or your business would thrive without you, then it is probably time to stop buying term life insurance.

However, at that time you may have other life needs, it may be time to consider either converting or purchasing cash value life insurance to protect your insurability and to have the flexibility to use the cash value funds for other things such as retirement or an unforeseen critical illness.

What Are the Differences Between A Variable Annuity and A Variable Life Insurance?

8/22/2017

Q. What are the differences between a variable annuity and a variable life insurance?

A. First, the key differences are the differences between an annuity product and a life insurance product, which are plenty. Next, we will need to get into the specific product features.

A Variable Annuity
A variable annuity is a tax-deferred retirement vehicle that allows the owner to choose from an offered selection of investments. When annuitized, it pays out a stream of income to the annuitant. The investments you choose for your variable annuity can increase or decrease in value and that means the overall value and your payout will follow. While a variable annuity can offer a nice upside, there is risk and if the investments inside the annuity decline in value, your payout will be decreased.

A Variable Life Insurance Policy
A variable life insurance policy is a form of permanent life insurance offering a death benefit to your beneficiaries upon your passing. A portion of the premium you pay for a variable life insurance policy goes toward the insurance, a portion toward various investments that the owner of the policy chooses and a portion goes to cover associated fees related to the management of the investments. The variable life insurance policy owner will be given options for the investments, generally mutual funds. As the value of those mutual funds go up and down, the cash value inside your policy follows.

There are many options to variable annuities and variable life insurance products that should be considered before purchasing. There are also many alternatives to variable annuities and variable life insurance products, we recommend you consider those alternatives as they tend to be better and cheaper.

How Does Accelerated Term Life Insurance Work

8/21/2017

Q. How does accelerated term life insurance work?

A. While most term life insurance policies only pay out when the owner dies, the accelerated term life insurance, especially if it's a free rider, gives you a nice benefit at the time you need the most - when you are seriously sick but won't die.

For details, here is an article from MoneyUnder30 worth a read.

Please contact us if you are interested in such Accelerated Term Life policies, we represent all of the life insurers in the U.S. that offer such policies.

Annualized Gains and Losses In Bull and Bear Markets 1903 - 2016

8/20/2017

This Morningstar Inc. chart shows the S&P 500’s annualized gains and losses through many bull markets and bear markets from 1903 to 2016.

“Ten of the 12 bull markets had annualized gains greater than 15%. Similarly, annualized losses exceeded 15% in 10 of the 11 bear markets. Second, bear markets typically unfold more rapidly than bull markets. The average annualized returns for bull and bear markets are 19% and negative 25%, respectively.” – Morningstar

The New Trend in Long Term Care Insurance

8/19/2017

Q. Long term care insurance premium is so high, what other options do I have?

A. Fewer and fewer Americans are buying long term care insurance because of runaway premium costs. However, it's important for seniors to have a long term care coverage that could help cover costs associated with nursing homes and other late-in-life expenses.

The new approach - combine long-term care coverage with life insurance or annuities. Such policies pay out if long-term care is needed; if it is not required, they will pay a death benefit or an annuity payout. In either case, the policyholders get something for the money they spend on premiums during the life of the policy.

Please contact us if you are interested in such combined life insurance and long term care policies.

Top 10 Ways to Reduce Income Tax and Capital Gain Tax - Part B

8/18/2017

In our last blog post, we shared the first part of top 10 tax saving tips, now we will continue with the rest tax tips to save income tax and capital gain tax -

6. Turn Short Term Capital Gains into Long Term Capital Gains. Short term capital gains (365 days or less) are taxed at your ordinary income tax rate. Long term capital gains (366 days or more) are taxed at your more favorable capital gains rates. Before selling an investment check to see how long you have owned it. A long-term capital gain can reduce your taxes obligation by 50% versus a short term capital gain.

7. Offset Capital Gains with Capital Losses. You can offset capital gains with capital losses. Short term capital gains can be offset by short term capital losses. Long term capital gains can be offset with long term capital losses. Net capital losses (losses minus gains) can be deducted up to $3,000 per year. Amounts exceeding $3,000 can be used in future years as a ‘capital loss carryover’.

8. Convert Pre-tax Retirement Accounts to Roth Accounts in Lower Income Years. Converting pre-tax retirement accounts to Roth accounts is a taxable event, subject to your income tax rate. Completing conversion in small increments could allow you to maintain your income tax bracket. Even better – complete conversions in lower income years (e.g.: when only one spouse is working or in retirement).

9. Avoid Double Taxation on You Investments. Track the cost basis of your investments. If you reinvest dividends or capital gains distributions on your investments be sure to add them to your cost basis. If you forget to add them to your cost basis you may pay taxes twice – once when you receive them and a second time when you sell them. Be sure to add them back into your cost basis.

10. Save for Higher Education in a 529 Savings Plan. For 2017, the maximum contribution per person, per beneficiary, to a 529 higher education savings plan is $14,000. There is a special five-year pull-forward rule, allowing you to contribute $70,000 in a single year, per owner, per beneficiary. If the money is used for higher education, all principal and gains are tax free. Funding your 529 also provides valuable estate planning benefits, as contributions and gains on those contributions are exempt from estate taxes.

Top 10 Ways to Reduce Income Tax and Capital Gain Tax - Part A

8/17/2017

Q. What are the best ways to reduce income tax and capital gain tax?

A. Here are top 10 ways to reduce income tax and capital gain tax:

1. Reduce Your Income Tax and Capital Gains Rates by Contributing to a Retirement Plan. Pretax contributions to employer sponsored retirement plans can reduce your adjusted gross income (AGI), which can reduce your marginal and effective income tax rates. Reducing your adjusted gross income can reduce your long term and short term capital gains rates. It may also exempt you from the ominous investment surtax (net investment income tax). Common retirement plans include: 401(k), 403(b), 457(b), pension plan, SEP IRA and SIMPLE IRA.

2. Claim Your Exemptions. Reduce your taxable income with exemptions. Typical exemptions include you, your spouse and your children under the age of 19 or students under the age of 24. Dependents may also include other relatives that you primarily support. Each exemption reduces your taxable income by $4,050. Exemptions are subject to phase-outs that begin when your AGI exceeds $261,500 for single filers and $313,800 for those married filing jointly. Exemptions phase-out at $384,000 for single filers and $436,300 for those married filing jointly.

3. Claim the Larger of a Standard Deduction or Itemized Deductions. The standard deduction for a single filer is $6,350 and for those married filing jointly it is $12,700. Itemized deductions include charitable donations, mortgage interest, state and local taxes, medical expenses and long term care insurance premiums. Itemized deductions may be capped or phased out based on your income due to the Pease limits. The Pease thresholds begin at $261,500 for single filers and $313,800 for those married filing jointly.

4. Reduce Your Income Tax Rate by Contributing to a Section 125 Cafeteria Plan. Pretax contributions to employer sponsored cafeteria plans can reduce your adjusted gross income (AGI). The reduction in AGI can reduce your long term and short term capital gains rates. The premium only plan (POP) can be used for your portion of health insurance premiums. The flexible spending account (FSA) can be used for medical expenses up $2,600. The FSA can be used for dependent care expenses up to $5,000.

5. Exercise Tax Diversification. Interest generated by fixed income investments like bonds are taxed at your income tax rate, while qualified dividends from most stocks and stock funds are taxed at your more favorable capital gains rate. Exercise tax diversification by placing income generating assets in tax shelters like 401(k)s and IRAs. Exercise tax diversification by placing higher yield dividend producing stocks and funds in tax shelters, and lower yield growth stocks and funds in taxable accounts. Your heirs will ‘appreciate’ the benefit of a step-up in their basis based on the fair market value of your investments upon your death and their inheritance.

We will discuss the next 5 tax saving tips in next blog post.

A Plan With Dual Protection of Life Insurance and Chronic Illness Rider

8/16/2017

Q. Any insurance plan that offers customers the dual protection of life insurance with a chronic illness rider?

A. There are quite a few options, one is Protective's solution, which enables customers to recoup their premiums down the road, and plenty of protections. See its flyer below.

Please contact us if you are interested in such products.

Roth IRA Conversion Recharacterization - Part C. Partial Recharacterization

8/15/2017

In our last blog post, we used an example to illustrate how recharacterization could save you money. Now we will discuss how to do partial recharacterization.

How to Partially Recharterize Roth IRA Conversion?
If you find yourself wanting to recharacterize some of your money, but not all of it. If all your investments are held in a single Roth IRA, unfortunately you can't do that.

However, if you create multiple Roth accounts — one for each of your investments. If you have 20 stocks, you'll need 20 Roth IRAs. If you have 10 mutual funds, you'll need 10 Roths.

Establishing separate Roth IRAs will grant you maximum flexibility to recharacterize a given asset if needed. But it will also exponentially increase your paperwork and record-keeping obligations, as well as increase your costs if you pay annual custodial fees for each IRA account.

So if you don't isolate each holding in a separate Roth IRA, you might later wish you had done so. And if you do, you might later wish you hadn't. It's a trade-off decision you have to make.

Roth IRA Conversion Recharacterization - Part B. An Example

8/14/2017

In our last blog post, we introduced the concept of Roth IRA conversion recharacterization. Now we will use an example to illustrate how it works.

How Roth IRA Conversion Recharacterization Works
Say your Deductible IRA owns $300,000 stock mutual funds at the beginning of the year. You converted and owed $120,000 in taxes. A year later, due to the economy, your stock funds are worth only $180,000. You still owe $120,000 to the IRS — leaving you with a paltry $60,000.

So you recharacterize. This turns your account back into a Deductible IRA. It's worth $180,000 (due to the market's decline). You convert all over again — and this time, you owe taxes of just $72,000 (assuming the same tax bracket as in the above calculation). Recharacterizing has just saved you $48,000!

While it's always possible that the stock market might decline 38% in a single year (like it did in 2008), it's unlikely that you will place your entire Roth IRA into stocks. It's more likely that you will diversify among a variety of asset classes, with some performing better than others.

What if you just want to recharacterize some of your converted money, but not all? Please keep reading our next blog post.

Roth IRA Recharacterization - Part A. What is Recharacterization?

8/13/2017

Q. I did a Roth IRA conversion but the account value dropped. Can I revert the conversion?

A. Yes, you can use a tactic called "recharacterization" to achieve your goal here.

What Is Roth IRA Conversion Recharacterization?
To protect you against the risk that the account might drop in value shortly after you convert, tax law allows you to "recharacterize" your account. In other words, you get to "unconvert" your IRA from the Roth back to the Deductible or Non-Deductible IRA you originally held. You must do this no later than the extended due date for the tax year in which you converted. After you recharacterize, you can then convert all over again — this time at the new lower market value. And you must wait until the later of (a) the beginning of the year following the year in which the amount was converted or (b) the end of the 30-day period beginning on the day you transfer money from the Roth back to a traditional IRA.

In our next blog post, we will use an example to illustration this powerful tactic and how it could save you lots of tax money.

Roth IRA Conversion Complication - 10. Impact College Financial Aid

8/12/2017

In our last blog post, we discussed a Roth IRA complication that your money could be untouchable for 5 years. Now complication #10.

Your Child's College Financial Aid Could Be Impacted
IRAs aren't included among your assets when a college calculates a financial aid package. However, when you convert to a Roth IRA, the money shows up on your tax forms as income for that year. If your income is artificially inflated when you fill out financial aid forms, you'll have to explain the situation to the school, and they may or may not take that information into consideration.

Roth IRA Conversion Complication - 9. Money Not Touchable For 5 Years

8/11/2017

In last blog post, we showed that it could be very complicated if you have an annuity in IRA. Now another complication.

Money Untouchable For 5 Years
When you make a direct contribution to a Roth IRA, you can withdraw that money at any time without penalty. The earnings, however, must stay in the account until you are 59½ — or you'll incur ordinary income tax rates plus a 10% penalty.

The rules for Roth IRA conversions are different. If you convert money to a Roth IRA and are under age 59½, you can't withdraw the rollover contributions for five years. If you do, you'll face a 10% penalty. (The rules for distributions of earnings are the same as with direct contributions.) There are exceptions for medical expenses, medical insurance premiums paid during unemployment, first-time homebuyers, death, disability, and higher education. And each conversion has its own five-year holding period.

In our next blog post, we will continue the Roth IRA conversion complication discussion.

Roth IRA Conversion Complication - 8. Having An Annuity in IRA

8/10/2017

In our last blog post, we showed that Roth IRA conversion could increase your medicare premium. Now complication #8.

What If You Have An Annuity In IRA?
Your tax obligation isn't limited to the cash value of the contract. Instead it's determined by the fair market value of the annuity, which is the cash value of the contract on the day you convert plus the actuarial net present value of any living or death benefits. (Your insurance company can calculate your present net value for you.)

For example, if your annuity has a cash value of $50,000 and the death benefit is worth $200,000, you'll owe taxes on $250,000.

Take extra care if you are only partially converting your variable annuity. When you convert an entire annuity, the annuity itself remains intact. But when you convert only part of an annuity, you are essentially splitting off part of your annuity to create a new IRA. This sounds simple enough, but breaking off a piece of the annuity could be the same as making a withdrawal. Depending on your annuity, a premature withdrawal could trigger the annuity to lock in a living benefit payout percentage earlier — and therefore much lower — than you had expected or planned. It could also cause the annuity to stop providing guaranteed growth or income.

In our next blog post, we will discuss another could be severe complication of Roth IRA conversion.

Roth IRA Conversion Complication - 7. Could Increase Medicare Premium

8/9/2017

In our last blog post, we discussed the complication due to Roth IRA conversion if you multiple types of IRA funds. Now complication #7.

Could Increase Your Medicare Premium
If you are covered by Medicare, your Part B premium is based on your income. Converting increases that income (if only for a year or two), which could add hundreds of dollars to your monthly Medicare costs.

In our next blog post, we will discuss another Roth IRA conversion complication.

Roth IRA Conversion Complication - 6. Unknown Tax Owe Till Next Year

8/8/2017

In our last blog post, we discussed that Roth IRA conversion could lead you to file estimated taxes. Now complication #6.

You May Not Know How Much Tax You Owe Till Next Year
Surprisingly, if you own both Deductible and Non-Deductible IRAs and you convert only the Non-Deductible IRA, you won't know how much you owe in taxes until next year. That's because the IRS considers conversions to consist proportionately of each type of IRA you own. For example, if you have $100,000 in IRAs — $40,000 in after-tax contributions and $60,000 in pre-tax contributions. To determine how much of the conversion you'd have to pay taxes on, you divide the pre-tax amount in the account by the total ($60,000/$100,000 = .60). Thus, you would have to pay taxes on 60% of any money you convert. So if you decide to convert $40,000, you'd pay taxes on $24,000. At a tax rate of 28%, that's $6,720.

But this calculation is based on the year-end value of your IRAs — including the money you converted — not their value on the day you converted. So if your account increases in value by year-end (or if you rollover a pre-tax 401(k) into an IRA) you might pay more in taxes than you expect.

Please keep reading for the next Roth IRA conversion complication.

Roth IRA Conversion Complications - 5. Could Require Estimated Taxes

8/7/2017

In our last blog post, we discussed that Roth IRA conversion could potentially cost you 10% IRA penalty. Now Roth IRA conversion #5.

Could Require You to File Estimated Payments
The IRS expects you to pay your taxes within a certain time frame in which you earn the money.

Earn January – March, pay by April 15
Earn April – May, pay by June 15
Earn June – August, pay by September 15
Earn September – December, pay by January 15

Normally, this is handled for you by your employer (through payroll deductions). But if you convert a large IRA, you could be required to file IRS Form 1040-ES, making payments roughly each quarter. If you don't, you could incur interest and penalties.

Please see next blog post for Roth IRA conversion complication #6.